ICAEW Chart of the week

With suggestions that the retail prices index (RPI) may be on its way out, our chart this week is on the subject of inflation.

RPI is consistently higher than the consumer price index (CPI), with RPI on average 0.8% higher than CPI since 2010. Similarly, RPI was on average 1.0% higher than CPIH (CPI including housing), the even more preferred inflation measure of the statistical world (not shown in the chart).

The Office for National Statistics would dearly like to get rid of RPI given the known methodological flaws in its calculation. They might describe RPI as ‘Not a National Statistic’, but legally they have to publish it every month.

The problem is that RPI is used in many financial contracts, including £410bn of index-linked gilts issued by the government. Using CPI or CPIH instead could result in lower returns for investors and (no doubt) litigation.

Statisticians and economics tend to joke about RPI as “inflation +1”, as it is close to a 1% higher than CPIH. That joke could provide a solution – while a straight replacement of RPI with CPI or CPIH would not be feasible, maybe redefining RPI as CPIH + 1% might be a starting point for a discussion with debt investors.